Building a Multigenerational Portfolio: Strategies to Help Withstand Economic Shifts

No doubt you’ve noticed the headlines the last few years – houses and cars are near all-time high prices and inflation continues to rear its ugly head for the first time in a generation. Not to mention crushing student loan debt for a lot of people and wages that don’t always keep up.

In fact, a large majority of people now think today’s kids will be worse off financially than their parents.

If you have (or plan to have) kids, that’s painful to hear. Most of us still want our children to work hard and earn their living, but that doesn’t mean we want them to struggle. More than ever, a lot of parents feel pressure to make sure their portfolio won’t just last through retirement, but that there will be enough left over to benefit their kids, grandkids and beyond.

WHAT IS A MULTIGENERATIONAL PORTFOLIO?

Enter the multigenerational portfolio, which balances short-term needs (college tuition, home purchases) with long-term growth (retirement), but also has an extra component of even longer-term wealth intended to outlast the person saving.

Just like you need to treat your shorter-term savings differently from your retirement investments, the multigenerational aspect of your portfolio is a separate goal with a different timeline and investment strategies. Let’s explore what that means.

CORE PRINCIPLES OF MULTIGENERATIONAL INVESTING

Here are the most important considerations for the long-term investing of family wealth.

DIVERSIFICATION

Some people think successful investing involves guessing which investments will pop next and putting all their money into it. That is, in fact, almost always a terrible way to make money (but a great way to lose it).

A more reliable and much easier way to “choose” investments is not to choose and just buy everything. Gains from strong performers can outweigh or at least mute losses from weaker ones, giving you a way to  capture the returns of the overall market without the risk of trying to guess which  stocks are “hot”.

APPROPRIATE RISK VIA STRATEGIC ASSET ALLOCATION

Another major way to help control risk while investing is to have the right asset allocation or mix of investment types for your circumstances and most importantly your risk tolerance. Your asset mix determines the extremes of the highest highs and lowest lows you’re likely to experience while investing. If you plan to invest for a long time, you have the ability to take more risk and ride out wilder swings. If your investment timeline is short, you need a more tightly controlled risk profile.

A traditionally diversified portfolio that balances growth and stability consists of, at the very least, stocks and bonds. It should also include investing across the universe of available stocks and bonds in the US. And for additional diversification benefits, your stocks and bonds should cover not only the US market, but international markets as well.

For even more diversification and only if appropriate, portfolios can include small allocations to things like:

• Real estate
• Cryptocurrencies
• Alternatives

Your strategic asset allocation is the way your portfolio is divided among these options or the percentages allocated to each. Diversification for families isn’t that different than diversification for your own goals. But when you’re investing for multiple generations, your risk level and allocation have to take everyone’s needs and timeline into account.

TAX EFFICIENCY AND ESTATE PLANNING

Accumulating money is one thing. Keeping it is another. Smart tax strategies and estate planning are critical when you’re talking about multigenerational wealth.

When it comes to taxes, it's not just the ones you’re paying you need to think about (although yes, you should have strategies for those too).

Federal estate tax is a thing. So is gift tax. Some states also have estate or inheritance taxes (or both!). And not only could tax be due when you die, it could be due again when heirs take the money out to use it. You can implement strategies now to help avoid some of these taxes for your family later.

Estate planning includes the process of planning for and minimizing these taxes, but it’s also what helps you decide how your assets will be passed down (plus when, and to whom, and for what) as well as who will be in charge of the process.

STRATEGIES TO HELP WITHSTAND ECONOMIC SHIFTS

Tough times in the economy don’t always directly overlap with down markets, but you can see how things like high unemployment and shrinking business output are likely to lead to investment losses. More than at any other time, it matters how you react – this may be a make-or-break moment for generational wealth.

REBALANCE DURING VOLATILITY

The markets love to mess with your carefully crafted portfolio. In bull markets, stocks start to take over your portfolio; in bear markets, the opposite usually happens.

An oversized portion of stocks will expose you to more risk. That’s why you rebalance, which means consistently returning your portfolio to its target mix. The more aggressively markets are rising and falling, the more often you’ll need to rebalance.

LIQUIDITY CUSHIONS

Selling stocks when markets are down just locks in your losses permanently, so you should generally try to avoid it. After all, the classic investing advice is “buy low, sell high,” not the other way around.

Instead, keep some cash handy for unexpected needs – both your day-to-day “emergencies” like a car repair or medical bill, as well as longer-term cash drains like losing your income, which could be more likely in a recession.

DOLLAR-COST AVERAGING

A lot of people naturally don’t want to put a ton of money into the markets when they’re down (We get it). On the other hand, buying stocks at peak prices can be emotionally hard too. “Dollar-cost averaging” is a fancy term for investing consistently over time (for example, $100 a week in markets good or bad).

It means you’ll buy more stock when prices are down and less when prices are up, giving you the opportunity to pay the blended average cost of the stock over time. For some people, it can be a more comfortable way to enter the market. And if you don’t have a lot of money available all at once, dollar-cost averaging is a great way to keep investing through economic cycles.

That said, if you do have money available to invest, we don’t think you should hold most of it back and gently dip your toe in by dollar-cost averaging. You’re generally better off getting it all invested so it has the chance to grow.

PRIVATE INVESTMENTS FOR FAMILIES

Private investments (those not publicly traded on the markets), which were previously only available to institutions or the very wealthy, have gotten a lot of press lately. There are still restrictions on who can invest in things like private equity and private debt, but they can potentially add diversification and may provide higher returns for those with the appetite and means to take the risk and understand the complexity.

That said, keep in mind that private investments:

• Can be hard or impossible to get your money out of at certain times
• Are less transparent, have less regulatory oversight and are priced less frequently than publicly traded investments
• Often come with high fees

We believe private investments are only right for certain investors, and only as a small portion of a portfolio (10% or less).

ROLE OF GOVERNANCE AND FAMILY PLANNING

A multigenerational portfolio isn’t just about investments; it’s about planning for transitions, and your estate plan isn’t complete until you talk about it. Gather your beneficiaries and decision makers to explain your intentions and avoid surprises. Discuss executors, trustees and even funeral wishes. Transparency now prevents conflicts later.

If you have specific goals for how the money will be used, make sure they’re clear too. Create a family investment policy statement to help keep everyone on the same page, educate younger generations early and align decisions with your family’s values.

COMMON PITFALLS TO AVOID

There are, unfortunately, a lot of stumbling blocks on the way to multigenerational wealth – that's why it’s not the norm. You can do an amazing job building wealth and still fail at making it last for your family. Here are some things to watch out for:

• Not ensuring the rest of your family is well educated about money or that they have a trustworthy resource to turn to. The whole point of multigenerational wealth is that it will outlast you, but who will manage it then?
• Ignoring the needs and goals of those who will come after you. They need to be taken into account when deciding on your generational portfolio strategy.
• Not paying attention to taxes. Without planning, they can drain away a large part of what you’ve built.

BUILDING A LASTING PORTFOLIO

At Edelman Financial Engines, we know a strong multigenerational portfolio isn’t built overnight, and it takes proactive planning across generations. A financial advisor can help design an approach that balances your needs today with your legacy tomorrow.